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Learn about data collection, WBS, cost centers, hammocks, and more for accurate budget preparation. Discover how to identify positive and negative variances, analyze true reasons, and calculate key performance indices for improved project forecasting. Practical examples provided.
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Controlling cost2 (seminar)
Budget preparation • Data collection • WBS • Cost centres • Indirect expenses & the use of hammocks • direct • overhead (indirect)
Data collection Novelty: • Estimates of work new for the organisation • Prepared from more detailed breakdown of the project than in a normal budgeting process • It is usefull to consider the effect of the information source on the data • Cost data = f(resource data, time data)
WBS • Work packages: • clearly defined and manageable • Definition of a WP: • all relevant information on labour, equipment, material, overhead etc. rates
Cost centre codes • Cost Breakdown Structure • 1 responsible person on every level • Organisation of these codes are project specific and different from the organisation’s existing system
Finalisation of the budget preparation • GANTT/PNT with cost associated to each activity • Code defining the cost centre to which each activity is assigned • Name of each single person responsible for the control of each activity cost
The budgeting system • Three sets of figures: • Planned costs • Committed costs • Actual costs
Planned and actual costs • Planned cost – Committed cost = Variance • Variance can be positive or negative • Negative variance is always bad, but the positive is not necessarily good.
3+1 alternative sources of a positive variance • Good control • Some outgoing not recorded • Some activity costs overestimated + • Activities for the period in question are not finished
3 alternative sources of a negative variance • Poor control • Extra unbudgetedwork was included • Some activity costs were underestimated
How to find out the true reason? • Improving the data : percentage of activity remaining percentage of activity completed • Variance analysis: • Variance can be broken down into a set of subbudget variances • A subbudget variance may be split into: • Volume/quantity variance • Rates variance
Cost & schedule variances • For any instant we can calculate: • BCWP: budgeted cost of work performed • ACWP: actual cost of work performed • BCWS: budgeted cost of work scheduled • From these, two variances can be derived: • Schedule variance in cost terms = BCWP – BCWS • Cost variance = BCWP – ACWP
Cost & schedule variances Cost variance Schedule variance
Example Project data: • Representative survey project with 300 given addresses and 3 interviewers • Interviewers are paid as follows: • 1000 HUF per day per interviewer as a fixed pay • 400 HUF per interview as a variable pay • Time schedule: • 10 interviews per day per interviewer • Work packages 30 interviews per day • Calculate the BCWS for every work package & day. • Given the following progress report for the first 6 days, calculate the percentages of activity completed, the BCWP and the ACWP.
Calculate the variances for day 6 Schedule variance in cost terms = BCWP – BCWS 72000 – 90000 = -18000 Cost variance = BCWP – ACWP 72000 – 75600 = -3600 The project is running late and overspent.
Forecasting and comparison of projects • Schedule performance index (SPI) = BCWP/BCWS • Cost performance index (CPI) = BCWP/ACWP • Budgeted cost to complete (BCC) = BAC - BCWP • Estimated cost to complete (ECC) = BCC/CPI • Forecast cost at completition (FCC) = ACWP+ECC • Calculate these for the previous example.
Solution • BAC = 150 000 • CPI = 72 000 / 75 600 = 95.24% • SPI = 72 000 / 90 000 = 80.00% • BCC = 150 000 – 72 000 = 78 000 • ECC = 78 000 / (720/756) = 81 900 • FCC = 75 600 + 81 900 = 157 500
Reading • Textbook chapter 10